05-31-2015, 06:42 PM
Hi ETD! Cool name and thanks for the warm welcome! I can't believe I didn't find this place earlier. I'm all about DG!
My thought on a more dynamic payout is NOT organically my idea... I just found a way to rank the market with an idea I stole from Lintner. Basically, a genius prof named Lintner interviewed something like 500 board of director members on dividend policy. Lintner came up with the formula, "Operating Income + Change in Long-Term Debt = Capital Expeditures + Dividends." I use the formula more as a ratio... so, (Operating Income + Change in Long-Term Debt) / (Capital Expeditures + Dividends). I then rank the market according to this ratio and only accept the the top 35% of the market.
I'm not so foolish as to use that ranking alone. I test the operating income on a number of measures. The formula can interpret an increase in debt as a good thing, which I don't disagree with... Additionally, I have no problem with transferring wealth from debt holders to stock holders. However, issuing high yield debt for a dividend is totally reckless, so I also do a credit analysis. Spending less on capital expenditures can make the formula look better, however skimping on capex will most likely hurt the business. So, I make sure that capex is greater than depreciation, as reported on the statement of cash flows. The only thing I require from dividends is the current yield must be greater than the yield-to-maturity of the 10-year t-notes.
There's a few other things I do in my due-diligence, and I'm getting better every day. I'm getting a lot of good results in my portfolio, in the form of total return, low turnover, and dividend increases.
My thought on a more dynamic payout is NOT organically my idea... I just found a way to rank the market with an idea I stole from Lintner. Basically, a genius prof named Lintner interviewed something like 500 board of director members on dividend policy. Lintner came up with the formula, "Operating Income + Change in Long-Term Debt = Capital Expeditures + Dividends." I use the formula more as a ratio... so, (Operating Income + Change in Long-Term Debt) / (Capital Expeditures + Dividends). I then rank the market according to this ratio and only accept the the top 35% of the market.
I'm not so foolish as to use that ranking alone. I test the operating income on a number of measures. The formula can interpret an increase in debt as a good thing, which I don't disagree with... Additionally, I have no problem with transferring wealth from debt holders to stock holders. However, issuing high yield debt for a dividend is totally reckless, so I also do a credit analysis. Spending less on capital expenditures can make the formula look better, however skimping on capex will most likely hurt the business. So, I make sure that capex is greater than depreciation, as reported on the statement of cash flows. The only thing I require from dividends is the current yield must be greater than the yield-to-maturity of the 10-year t-notes.
There's a few other things I do in my due-diligence, and I'm getting better every day. I'm getting a lot of good results in my portfolio, in the form of total return, low turnover, and dividend increases.